In this episode of 17 Minutes with 17Capital, host George Lee is joined by Augustin Duhamel, co-founder of 17Capital, to retrace the firm's early years.
From first meeting Pierre-Antoine de Selancy in Asia, to the conviction that the business needed to be built in London, Augustin explains how a first-time team backing a first-time strategy set out to establish an entirely new category of financing for the private equity industry.
He reflects candidly on launching in the summer of 2008, holding a first close with three investors and just €23 million against a €200 million target, and winning over the banks, lawyers and auditors who went on to become long-term partners. Augustin traces some of the early the milestones including the first deal alongside a Canadian pension fund, opening a New York office, the $3 billion Credit Fund and the partnership with Oaktree – before making the case that, with only a minority of managers having used NAV finance so far, the market remains at an inflection point and there is more growth is still to come.
Podcast Transcript
GEORGE
Hello and welcome to 17 Minutes with 17Capital, the podcast where we explore the ideas, people and trends shaping NAV finance and the wider private markets industry. I'm your host, George Lee. In our first episode, Pierre-Antoine de Selancy shared the story behind the origins of NAV finance. Today, I'm excited to be joined by the other co-founder of the partnership that became 17Capital, Augustin Duhamel.
We'll retrace the early years from launching in the middle of thefinancial crisis to building a business that helped shape and establish the NAV finance market today. Augustin, welcome to the pod.
AUGUSTIN
Thank you. Very nice to be here.
GEORGE
So, before we jump into 17Capital, let's start at the very beginning. What were you doing in the early years of your career and how did yours and Pierre-Antoine's paths first cross?
AUGUSTIN
Well, I guess I had a pretty traditional start. Studied business, started working with an investment bank called Paribas at the time, before it was bought by BNP. But started in Asia, where actually I met with Pierre-Antoine. We were both working for the same bank. Stayed in Asia for a few years, moved back to France as you can hear, I'm French originally. Started working in management consulting but stayed pretty close to Pierre-Antoine. And after a few years, Pierre-Antoine, who was working in private equity, came tome saying he had an idea he wanted to share and test my reactions. And we started working on what became actually a project until we decided it was exciting, and then we decided to launch 17Capital back in the later part of 2007.
GEORGE
Perfect timing.
AUGUSTIN
Yes. We didn't know it at the time, but we actually officially launched early 2008.
GEORGE
So the two of you were living in Paris at the time. Was there ever an idea to set up 17Capital in France or was it always going to be in London?
AUGUSTIN
No, I don't think there was. I think after the work we had done on the project, we were absolutely convinced that it had to be in London. And there were a number of reasons for that. First of all, we are lending against private equity portfolios. The UK private equity market is the largest in Europe, so there was a very good reason to be there.
But the idea was also to build a first pan European, but then global franchise. And we thought that the talent pool was much bigger in London than it was anywhere else. So, we decided that we would build a business in London and we would build a team in London where we could find the talent that we wanted to recruit.
GEORGE
As a proud Brit, I'm glad that you did.
Pierre-Antoine described the launch during the global financial crisis as interesting in the English sense of the word. How was Fund 1 from your perspective? How did it pan out?
AUGUSTIN
Well, I think it was a bit beyond interesting, and some people could call it brutal. We had our regulatory approval, the FSA at the time, in July2008, meaning that we were ready to officially launch in September 2008,precisely when Lehman collapsed and the world started to collapse as well. Now, we made a very important decision just before then.
By the time we had our approval, we also had three investors who were ready to commit to the fund. We were targeting a 200 million euro size. And in the industry, the rule of thumb is usually that you hold the first close when you have more or less half of your target fund size ready to sign.
Those three investors were only 23 million at the time, so very far from half of the target size. But we still decided to hold a close with those investors to get the fund running, to get the business running. And I think that was probably one of the best business decisions that we made, because if we hadn't had that first close in July 2008, I'm not sure we ever would have had one.
GEORGE
I guess from a fundraising standpoint, it didn't come as a huge surprise how difficult it was. Maybe you didn't anticipate it being quite as hard. Was there anything that was a surprise about the launch?
AUGUSTIN
Of course, fundraising was difficult. Yes, we were raising a first-time fund for a first-time strategy with a first-time team, which is definitely too many firsts for investors. And beyond that, the GFC had basically frozen any investment decision at the time. But before raising money, what we did not realize is that we had to convince the whole ecosystem to work with 17Capital as a firm and the first difficulty was to convince service providers to work with us.
We definitely wanted to build an institutional business, and we wanted to work with the best service providers. And we had to sign with a bank, with accountants, with legal advisors. And each time it proved to be difficult, challenging to convince those very established firms to work with what at the time was two French men travelling to London every Monday morning and believing that they would start a successful business.
So we found ourselves in front of people who didn't pick up the phone. That's quite usual when you're starting a business. People who would not give us a quote, even if we insisted for one, and people who thought that they were losing their time with us and were frankly showing it.
GEORGE
It turned out well for those that did answer the phone, though, and those that did choose to work with us…
AUGUSTIN
Yes, we're still working with the same bank. Of course, we added a few banks to the pool, but the first bank who worked with us, we are still loyal to them. Same for our legal advisors, same for our auditors. So, we have taken the view that those people who backed us from the very early days, we want to stay with them as long as we can.
GEORGE
Okay. So, after convincing the service providers, after convincing the first three investors to commit to the fund and having the 23 million closed, we went out to source the first deal. How was that?
AUGUSTIN
Well, it was a conscious decision in the sense that we realized that in the heart of the GFC, we were losing our time trying to convince investors to come into the fund. Especially with only a concept and an idea and we thought we would be better off proving the concept with the first deal.
So that's when we switched gears and went out to potential counterparties, telling them that we had money to lend them against their portfolios. And we found a first deal in France where we had worked with people who knew we would be serious people to work with. The only issue we had was that the first deal was 30 million euros. And with a fund of 23 million, you can only, with diversification rules, you can only put somewhere around 5 million into a single transaction. So, we were short of 25 million. Having said that, we found a very strong co-investor who was a Canadian pension fund and who invested alongside us and who allowed us to close that first deal, which was instrumental. It was with a listed entity which allowed us to publicize the transaction and therefore to be able to showcase the concept and the strategy with something very practical and convincing.
GEORGE
So you secured the cornerstone, commitment to Fund 1, and also executed the first deal in one hit.
Looking back, what are some of the other most important milestones for 17Capital, moments that really kind of shaped the way the firm is today?
AUGUSTIN
Well, obviously the opening of the New York office. Again, we are lending against private equity portfolios, buyout portfolios, and like many other industries, the US market is bigger than the European market. In our industry, it's somewhere between twice and three times as big. So it is important, it was important for 17Capital, to establish a presence there.
GEORGE
Was that always part of the plan?
AUGUSTIN
Yes, absolutely. What happened is that we had to wait for longer. We had to wait for our fund number four to be raised. It gave us a critical size which allowed us to finance the opening of the office and to recruit a proper team there. We wanted to do it earlier we had to wait, but once we did it, that allowed our US expansion, which has proven to be very successful to date.
The other milestone I would mention is the launch of what we call our Credit Fund. And that was back in 2017, 2018. We realized that there was demand for what the market now calls NAV loans, that the sourcing was the same as what we were doing before, speaking to the buyout managers, that the analysis of those transactions was very similar, analysis of the manager, analysis of the portfolio companies, and therefore that we had an angle to launch a new product there.
And again, it was a very good decision. The Credit Fund 1 closed at $3 billion in 2022. That was, according to Preqin, the largest first-time credit fund raised in Europe. So, we were very happy with that. That was also critical to the extent that both products, our strategic lending fund and the credit fund are very complementary and allow us to serve the GP’s we work with much better.
So that was an important milestone. And the next one, of course, is our partnership with Oaktree. Back in 2021-22, we were looking for a US partner to accelerate our growth in the US. We spoke to a number of potential partners. We chose Oaktree, among others, with a clear view that first they have a very strong credit philosophy and credit franchise which fits well with 17Capitaland a very strong brand name in the US of course.
It's been more than four years now. I'm very happy to say that we clearly made the right choice.
GEORGE
And how did you decide that 2022 was the right time? I mean, I assume over the last kind of 15-20 years leading up to this point, you've probably been approached countless times. How did you decide now is the right time to enter a partnership like that?
AUGUSTIN
You're right to mention that we had been approached a number of times, including the early days, when, to be clear, some people wanted to take advantage of the market environment. But then we decided that we wanted to work on the growth of the business before partnering with anyone. 2021- 22 again was a time where we were in a good position, having closed our Strategic Lending Fund 5 in the process of closing our Credit Fund 1.
So, we had a good market position, but at the same time we knew that if we wanted to accelerate, we needed to capitalize on the US market, especially with those larger funds that we had raised.
GEORGE
And I guess Oaktree, with a vast global network of GP sponsors, is a way to kind of to do that and to short circuit it.
AUGUSTIN
I think it's a combination of factors. They have strong relationships with sponsors, especially in the US. They have a fabulous brand name in the LP community, not only thanks to Howard Marks memos, but everyone in the industry knows his memos, everyone reads them. But beyond that, the investor base of Oaktree is second to none.
They are not distributing us, but their brand name is very useful for us when we speak to new investors.
GEORGE
Switching gears and turning to the future. You helped create this market and 17 is now considered a leader within it. What's next for 17Capital and the NAV finance market more generally?
AUGUSTIN
That's an interesting question. I think we are at an inflection point, and I would say we are still fairly early in the market for one simple reason which is that it's still a minority of managers who are or who have used NAV finance. There's plenty of other managers who are still to try the product, and we are of course there to make sure they do.
So, what I see going forward is much further growth, faster growth, and 17Capital should be focused on its core products, where I think we have a lot of legitimacy, but also a lot of willingness to keep on growing the market and keep our leadership.
GEORGE
So, to finish, we have the 17 second challenge. This is where each guest has to answer my final question in 17 seconds or less. So Augustin, for you, your 17 second challenge is what is the best piece of advice that you have been given on this remarkable journey of yours?
And the clock starts now.
AUGUSTIN
I would say never compromise. We had some industry veterans who supported us and were part of the board of 17Capital in the early days, and they said, never compromise on risk, never compromise on values, never compromise on people.
GEORGE
That was definitely longer than 17 seconds, but I'll allow it. Thankyou. Thank you very much, Augustin, for those very entertaining insights.
If you enjoyed this, please subscribe to 17minutes with 17Capital wherever you get your podcasts. We'll be back soon with more insights around NAV Finance. Until then, I'm George Lee and this has been 17 Minutes with 17Capital.
VOICEOVER
17 minutes with 17Capital.
This podcast is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security or fund. The information in the podcast is based upon information available as of the date of the recording, and 17Capital has no obligation to update such information and nor does it guarantee the accuracy or completeness of such information.
Any assumptions, assessments, beliefs, intended targets, or statements of the like regarding future events or which are forward looking contained herein constitute only subjective views, estimations or intentions and should not be relied upon, are subject to change due to a variety of factors including fluctuating market conditions and economic factors. Investment decisions should be made at your own discretion and risk.
Please conduct independent research or consult a qualified financial advisor before making any investment. Any information contained in this podcast must be kept strictly confidential and may not be reproduced or used for any other purpose without the express prior written consent of 17Capital.
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